Recovering From Financial Mistakes Like The Wealthy

| March 22, 2019

Regardless how experienced or educated you are, you will still make financial mistakes, some of them humdingers. Personal finance blogs and media outlets frequently share basic financial mistakes to avoid: spend less than you earn, invest in index funds, avoid debt and so forth. All this is good advice, but it goes a lot deeper than this.

There are financial mistakes that involve much larger sums of money that can cause permanent damage to your financial situation. To top it off, we are in a much different economic environment than ever before.

Side hustles are more common than ever and no matter what kind of activity you consider a side hustle, it is still a business. And business can inflict as much, and even more, pain than student loans, credit card debt or job loss.

Today we will move beyond the basic advice and delve deep into the financial mistakes that are harder to plan for and hence avoid; the financial mistakes that can not only surprise, but destroy a fortune of any size.

To help you understand the seriousness of these mistakes, I will use examples from my past. The good news is I recovered from each disaster much wiser, using the new-found experience and knowledge to push profits to greater heights.

Some of the issues we will touch on are foreign ideas compared to the “spend less” advice. For example, you will see how over-confidence and arrogance caused me plenty of pain throughout my life. What seemed like a great idea was anything but, and I walked into it eyes wide open because of that pair of rose-colored glasses I like to keep handy.

Worse, I should know better. As a tax accountant with a history as a financial adviser, I should have know better. The things that got me were not alien concepts. And if they can get me, they can get you no matter how smart you think you are.

My goal is to give you the tools to avoid these errors in thinking that virtually guarantee financial disaster. I will also share how I recovered from each event and grew from it. Hopefully you recognize the patterns of my errors in your behavior and make corrections before you suffer the same results.

Young and Dumb

In my younger days, I made a lot of solid financial decisions. I also got lucky.

I avoided the over spending and debt issues that plague so many and I never put any of my education, formal or informal, on the credit card. That means I was able to invest in mutual funds (I used actively managed funds back then) and individual stocks.

Growing up in the backwoods of Nowhere, Wisconsin had its advantages. I never made a lot of money, but had nowhere to spend it even if I did. I was on a sort or forced frugality diet so don’t think I was somehow smarter than you. I wasn’t!

Those first years of adulthood were formative years. I grew up on a farm and knew of nothing else. Then the family farm went teats up (we were dairy farmers) just under six months after I graduated from high school. Now what was I going to do with my life?

Growing up rural and poor meant I dreamed of wealth. I wanted to be the richest man alive some day and go to the moon, too. To farm, of course. I was an even mixture of Elon Musk and Warren Buffett.

Things didn’t pan out as planned, but I did better than most, so no complaints. I was also on the cuff of my first of many significant financial mistakes.

The family farm was gone, but the dream lingered on. It must have been about 1984 when I decided I would move my investing horizons to something that could grow wealth faster than the red-hot stock market of the mid 1980s.

I kept money in individual stocks and mutual funds, but I was ready to tackle commodities. Soybean futures to be exact.

Well, I had a farming background! I knew (I thought I knew) more than those pinheads sitting in an office about farming and soybeans. So I started trading soybeans and (OMG!) soybean options.

As with most financial disasters, things started out promising. I had the golden touch and don’t think for a moment people weren’t noticing.

I knew farming and I knew soybeans, though we never grew soybeans on our family farm.

I turned a small investment of a few thousand dollars into nearly $40,000. And that is when this poor farm boy started to experience an inflated skull.

I had managed to accumulate other investments (mutual funds and stocks) of nearly $100,000. Not bad for a 20 year old that started out with maybe a thousand or so when he turned 18.

Now that I had another $40k to grace my net worth ledger, I wanted to get serious about this soybeans thing. I sold only mutual funds at the time to fund my next big push. However, family noticed my talents, too, and dear old dad thought he would hitch a ride to the tune of $9,000.

Well, if I hadn’t made every possible move to hex my parade I don’t know what else I could have done to accomplish it.

And wouldn’t you know it. Now that I was all in, I started to believe in my infallibility. I made a risky (all commodity trades are risky by nature unless you are hedging: buying and selling commodities as a producer or consumer of said commodities) all or none trade. If it worked, there would have been a six figure gain. If it failed, I would lose most of my account value.

At the time, I didn’t realize how much I was putting on the line. I was too arrogant to see it. In three days, it was over. Soybeans locked limit (the maximum move a commodity can move in one trading day) and it wasn’t going my way.

I was actually lucky! When a commodity locks limit against you, it is impossible to close your position. The losses can mount fast and the leverage is massive.

Dad did not get much of his $9,000 back and most of my $40,000 was gone. I will never forget that feeling. It took a long time to recover emotionally. Good thing dad accepted what happened. He doesn’t talk about it all these years later.

Lesson 1: Commodities are not an investment!

I know this is a hard concept for people to understand, but commodities, along with land and other such so-called investments, are not real investments.

Land is not an investment unless you intend to improve said land, creating value, the basis of investing. Gold, corn, pork bellies (bacon) and soybeans are NOT investments; they are speculative tools unless you are hedging your production or consumption of the underlying commodity. And if you are hedging, it is a business tool to control costs; still not an investment.

Lesson 2: Don’t get cocky!

Just because you are on a roll doesn’t mean you are right. I thought I was so smart as every trade went my way. Then I lost all those gains and more in one stupid trade thinking I was smarter than everyone else. (Remember those office pinheads this farm boy was smarter than?)

Whether it be in business or any other endeavor in life, always know it might be luck working your way temporarily. Luck is a fickle creature and only a fool relies on such a fickle beast. Caution is warranted at all times when investing and in business.

Lesson 3: Don’t borrow to invest!

While I didn’t borrow from the bank, I did take money from dad (actually an equity investment) to increase the size of my trade. Both choices (bank loans or an equity investment from dad) are incredibly bad.

Lesson 4: You can’t consistently trade profitably!

I know, I know. Everyone thinks they can do it. We hear about money-center banks earning gazzions every quarter trading. Except they are hedging more than speculating. And when they decide to speculate, we remember their name as Lehman Brothers: 158 years of conservative investments pissed away in a breath.

Back when I was young, I didn’t have the experience I have today. Now, after all these years as a tax accountant, I can show you an endless list of clients who have traded their way poor. I’m trying to recall even a single client who traded his way to a fortune and coming up blank. I do have several in mind who lost a life of work “playing the market”.

Lesson 5: You don’t “play” the market!

Enough said.

Lessons Learned

The all or none mindset died for me that day. I never again bet the farm on a flyer.

The loss also instilled in me a deep desire to research investments before investing or adding to an investment. I have made investing mistakes over the years, but nothing like that fateful day in 1984 when soybeans were going to send Hillbilly Accountant to the promised land.

When it sounds too good to be true, it probably is. I missed plenty of deals due to my caution. I also missed a fair number of blood-lettings, too.

Over-confidence, cockiness and arrogance are hard to avoid when enjoying a temporary visit from Midas. Controlling emotions are more important than almost any other factor when investing. People want to buy a “hot” market and get scared out of a bear market. Buying high and selling low has never been a good strategy. I have trained myself to react emotionally the opposite of normal human nature. When a great company is on sale, I buy (after adequate research). I only sell if it makes sense in my personal situation. The “market” has nothing to do with my decision process.

Changing the World

Now I will share a business disaster from the archive.

When it comes to business, including side gigs or side hustles, mistakes will happen and there is always a cost. A well thought out plan has half a chance of creating a profit. Then there are those times when we are introduced to humility.

Sometimes an opportunity that looks incredibly good fails miserably. Usually rose-colored glasses were involved.

In this situation, I was going to change the world and challenge the Big Guys.

You might have noticed the 1040.com banners on this blog where you can prepare your own tax return. Well, back when that program was just beginning (it was in beta the first year offered to the public), I saw an opportunity to create a massive platform.

My professional tax software provider created the 1040 environment. I wanted to capitalize on this as soon as possible as other clients of the software provider had the same chance I did. I had to move quick to lock up market share.

To do this, I developed a large advertising campaign: television mostly. My ad schedule was aggressive, especially for such a test idea. But I wanted to get a jump on the competition.

Long story short, I spent $80,000 in advertising before I pulled the plug early in the tax season. The revenue: $3,000.

Yes, I lost $77,000 is a few weeks. Thank God I didn’t get caught in the sunk-cost fallacy! It was also a good thing my tax practice was established. I still had a profitable year, just $77,000 smaller.

The story is short, but the lessons many. Since the program is still around and much improved (one of the best, if not the best, in my opinion), you might surmise there is a happy ending to the story. There is, kinda.

Lesson 6: Don’t trick yourself into rushing a project!

It is tempting to forgo proper testing before a full product launch. The 1040 project had plenty of potential, but the program was still in beta. There were issues that first year of operation. And I had no exclusive. Even a jump-start on the competition didn’t guarantee I’d keep the clients.

The competition never materialized. Yes, the Big Guys were there and still are. But the worry other accountants might want to capitalize on this, squeezing me out of the market, never happened. I rushed for no reason and dropped a cool 77 grand for nothing. Plus all the aggravation!

Lesson 7: Sunk cost!

Good fortune smiled on me. This project was new enough and the capital invested didn’t cause a sunk-cost mindset to manifest itself. If it had, the damages would have been multiple times larger.

Lesson 8: Arrogance again!

I was so cock-fire sure I was right on this I was willing to go all in with a pair of twos. Stupid!

Liking an idea is NOT good enough! I needed to do market research and test the product more fully before unleashing such a large investment. I put the cart before the horse and paid the price.

Never fall in love with an idea or project; it’s business and nothing more.

Lessons Learned

Some mistakes are merely a lesson. In this case, I knew I had a good idea on my hands, I just executed wrong. As 1040 improved their product, clients from the first year came back (at least a few did). So I had a quasi annuity on my hands. In 3 or 4 thousand years, I might break even.

I continued to love the DIY tax preparation idea. Every year since that fateful first year, I continued to promote the program with free promotional ideas. I published articles mostly with links to the platform. Growth was slow, but noticeable.

Then I had this idea to hook up with a popular blogger and sought an audience with Mr. Money Mustache. MMM didn’t care to partner with me on the idea, but gave it a push, which helped tremendously.

This blog has also provided steady pressure on the growth trend. To date, I have recouped nearly $40,000 of the original $80,000. At current rates, I will break even in about six years; if it continues to grow, a bit faster.

Lesson 9: Never give up!

If the business plan is solid, never give up. But always evaluate before leaping! And always test before spending. There are plenty of free opportunities to share information on your product or service. If I hadn’t sunk $80,000 into this beast, I would already be profitable!

Lesson 10: Think before leaping!

As I already said. But it was worth repeating since this is the cause of a great many errors.

Coda

Of course I made many, many more than these two financial mistakes in my life. Thankfully most were small and I was a fast learner (maybe that should be Lesson 11).

The biggest mistake you can ever make is to get gun shy after a financial disaster. Once you are too afraid to take action, you are in a death spiral.

You will make mistakes! Lots of them. Show me someone who never made a mistake and I’ll show you someone who never tried.

All is not lost if you learn from your mistakes.

Sometimes you even try something knowing it is a mistake just to gain the knowledge and experience! Keep the investment small so the damage is light, but do try. It is the only way to learn.

This post is the result of a question on Facebook. In the Choose FI group, the question was asked about what our biggest financial mistake was. I commented tongue-in-cheek that I would need a few million words and plenty of time to explain the errors of my ways. A reader of this blog commented to me this would be a good blog post idea. I agreed and here we are.

(Tax season is getting long and fatigue is setting in. I didn’t want to research another tax issue to publish while swamped with tax issues at the office.)

We learn far more from our failures than our successes. Success convinces us we are right, like my original soybean trades. Of course, we sometimes discover we were not as right as we thought we were.

Failure on the other hand leaves its mark. We remember pain a lot longer than the pleasure.

You will make mistakes, lots of them. I’ll make many more as well as my tax practice evolves along with this blog and the courses I plan on publishing soon. If any of these things fail, they will only cause minor pain.

I learned my lessons.

Note: This article originally appeared at The Wealthy Accountant.

 

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Category: Personal Finance

About the Author ()

Keith Schroeder is the tax adviser of Mr. Money Mustache and other influential personal finance bloggers. He lives in NE Wisconsin on a farm with his wife and daughters enjoying the natural world. His accounting firm has served the community for over 30 years. He also writes The Wealthy Accountant blog and is the highest net worth blogger listed on Rockstar Finance.

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